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The Role of Credit in International Business Cycles

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  • TengTeng Xu

Abstract

This paper examines the role of bank credit in modeling and forecasting business cycle fluctuations, and investigates the international transmission of US credit shocks, using a global vector autoregressive (GVAR) framework and associated country-specific error correction models. The paper constructs and compiles a dataset on bank credit for 33 advanced and emerging market economies from 1979Q1 to 2009Q4. The empirical results suggest that the incorporation of credit provides significant improvement in modeling and forecasting output growth, changes in inflation and long run interest rates, for countries with developed banking sector. Impulse response analysis provide strong evidence of the international spillover of US credit shocks to the UK, the Euro area, Japan and other industrialized economies, and the propagation to the real economy.

Suggested Citation

  • TengTeng Xu, 2012. "The Role of Credit in International Business Cycles," Staff Working Papers 12-36, Bank of Canada.
  • Handle: RePEc:bca:bocawp:12-36
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    3. Nina Biljanovska & Alexis Meyer-Cirkel, 2016. "Testing Shock Transmission Channels to Low-Income Developing Countries," IMF Working Papers 2016/102, International Monetary Fund.
    4. Dees, Stéphane, 2016. "Credit, asset prices and business cycles at the global level," Economic Modelling, Elsevier, vol. 54(C), pages 139-152.
    5. Mrs. Jana Bricco & Ms. TengTeng Xu, 2019. "Interconnectedness and Contagion Analysis: A Practical Framework," IMF Working Papers 2019/220, International Monetary Fund.
    6. Alessandro Rebucci & Ambrogio Cesa-Bianchi & M. Hashem Pesaran & TengTeng Xu, 2012. "China's Emergence in the World Economy and Business Cycles in Latin America," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Spring 20), pages 1-75, January.
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    8. Donal Smith, 2016. "The International Impact of Financial Shocks: A Global VAR and Connectedness Measures Approach," Discussion Papers 16/07, Department of Economics, University of York.
    9. Eickmeier, Sandra & Ng, Tim, 2015. "How do US credit supply shocks propagate internationally? A GVAR approach," European Economic Review, Elsevier, vol. 74(C), pages 128-145.
    10. James Morley, 2016. "Macro-Finance Linkages," Journal of Economic Surveys, Wiley Blackwell, vol. 30(4), pages 698-711, September.
    11. Kopoin, Alexandre & Moran, Kevin & Paré, Jean-Pierre, 2014. "Bank Capital, Credit Market Frictions and International Shocks Transmission," MPRA Paper 65512, University Library of Munich, Germany, revised 10 Nov 2014.
    12. Konstantakis, Konstantinos N. & Soklis, George & Michaelides, Panayotis G., 2017. "Tourism expenditures and crisis transmission: A general equilibrium GVAR analysis with network theory," Annals of Tourism Research, Elsevier, vol. 66(C), pages 74-94.
    13. Samargandi, Nahla & Kutan, Ali M., 2016. "Private credit spillovers and economic growth: Evidence from BRICS countries," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 44(C), pages 56-84.
    14. Milcheva, Stanimira, 2013. "Cross-country effects of regulatory capital arbitrage," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5329-5345.
    15. Seitz, Franz & Baumann, Ursel & Albuquerque, Bruno, 2015. "The information content of money and credit for US activity," Working Paper Series 1803, European Central Bank.
    16. Kopoin, Alexandre, 2015. "Cross-border Banking, Spillover Effects and International Business Cycles," MPRA Paper 65515, University Library of Munich, Germany, revised 06 Apr 2015.
    17. M. Hashem Pesaran & TengTeng Xu, 2013. "Business Cycle Effects of Credit Shocks in a DSGE Model with Firm Defaults," Staff Working Papers 13-19, Bank of Canada.
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    24. Samargandi, Nahla & Kutan, Ali M. & Sohag, Kazi & Alqahtani, Faisal, 2020. "Equity market and money supply spillovers and economic growth in BRICS economies: A global vector autoregressive approach," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).

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    More about this item

    Keywords

    Business fluctuations and cycles; Credit and credit aggregates; Econometric and statistical methods; International financial markets;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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